Documents & Reports

Between a rock and a hard place : the monetary policy dilemma in Latin America and the Caribbean (English)

Abstract

After a growth slowdown that lasted six years the Latin American and Caribbean (LAC) region is finally expected to resume positive growth in 2017, with market analysts forecasting real GDP growth of 1.2 percent for 2017 and 2.3 percent for 2018. In general... See More +After a growth slowdown that lasted six years the Latin American and Caribbean (LAC) region is finally expected to resume positive growth in 2017, with market analysts forecasting real GDP growth of 1.2 percent for 2017 and 2.3 percent for 2018. In general, external factors that are typically important drivers of growth for the region (such as commodities prices and growth in China for SA) and growth in the U.S. for Mexico, Central America, and the Caribbean (MCC) are expected to remain roughly stable, or even show slight improvements. On the other hand, the gradual increase in world interest rates, led by rises in the Federal Funds Rate and the slow unwinding of the large increase in the Federal Reserve’s balance sheet since the Global Financial Crisis may eventually negatively affect global liquidity. Indeed, as emphasized in Chapter 1 of the report, a major macroeconomic worry in the region comes from the weak fiscal situation in most countries, particularly in SA. In this context, Chapter 2 – the core of this report – analyzes in detail how monetary policy has been conducted in the region and what may be its potential to support growth, without risking some hard-won gains in the battle against inflation. Specifically, the chapter is built around a critical monetary policy dilemma faced by many countries in the region.
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